Obverse of the first $1 bill, issued in 1862 as a legal tender note featuring Treasury Secretary Chase, who later held as Chief Justice that such bills are unconstitutional, before being overturned

The Legal Tender Cases primarily involved the constitutionality of the Legal Tender Act of 1862, 12 Stat.345, enacted during the American Civil War.[3] This act authorized issuance of paper money, United States Notes, to finance the war without raising taxes.[4] The paper money depreciated in terms of gold and became the subject of controversy, particularly because debts contracted earlier could be paid in this cheaper currency.[5]

In Hepburn, Chief JusticeSalmon P. Chase held for a 5-3 majority[6] of the Court that the Act was an unconstitutional violation of the Fifth Amendment. Ironically, Chief Justice Chase had played a role in formulating the Legal Tender Act of 1862, in his previous position as Secretary of the Treasury. On the same day that Hepburn was decided, President Ulysses Grant nominated two new justices to the Court, Joseph Bradley and William Strong, although Grant later denied that he had known about the decision in Hepburn when the nominations were made.[7] Bradley and Strong subsequently voted to reverse the Hepburn decision, in Knox v. Lee and Parker v. Davis, by votes of 5-4. The constitutionality of the Act was more broadly upheld thirteen years later in Juilliard v. Greenman.

Article I, Section 10 of the Constitution explicitly forbids the states from issuing "bills of credit" (promissory notes) or making anything but gold and silver coin legal "tender", whereas there are no corresponding explicit prohibitions against the federal government, nor any explicit authorization. The Tenth Amendment refers to reserved powers that only the states can exercise, as well as powers not delegated that continue to reside in the people. "Concurrent powers" also exist, which may be exercised by either the states or the federal government, such as the power to repel invasions, and arguably including power to make legal tender (e.g. in federal territories or elsewhere). Article I, Section 8 of the Constitution specifically gives Congress power to "borrow money" and also power to "coin money and regulate the value" of both U.S. and foreign coins, and regulate interstate commerce, but does not explicitly and unambiguously grant Congress the power to print paper money or make it legal tender.

The federal government first issued paper money in 1861 in order to fund the Civil War.[8] Before that, all US paper money was bank issued. For example, paper notes were issued by the First Bank of the United States, which was a private corporation chartered by the federal government.[9] Congress had also authorized paper money (e.g. Continentals) even before the Constitution was adopted. The Continental was issued by both the individual states and the Continental Congress under the Articles of Confederation. Those Articles specifically allowed the issuance of legal tender paper money, at the time called "bills of credit."[10]

Originalists like Robert Bork have objected to enforcing the intentions of those framers who may have believed that paper money should be prohibited: "Scholarship suggests that the Framers intended to prohibit paper money. Any judge who thought today he would go back to the original intent really ought to be accompanied by a guardian rather than be sitting on a bench."[11] According to law professor Michael Stokes Paulson, "Among the most common canards in critiques of originalism is that, under the original meaning of the Constitution, the issuance of paper money as legal tender would be unconstitutional, sending our economy into disarray."[12]

Regarding paper money, Nathaniel Gorham explained at the Constitutional Convention that he "was for striking out" an explicit power of Congress to issue paper money, but Gorham was also against "inserting any prohibition."[13] That is what ultimately happened at the Convention: language explicitly giving the federal government power to issue legal tender paper money was removed on a vote of 9-2, but an option allowing the issuance together with a prohibition against making it legal tender was not acted upon. Article I, Section 8 of the Constitution gives Congress power to "borrow money on the credit of the United States," and therefore Gorham envisioned that "The power [e.g. to emit promissory paper], as far as it will be necessary or safe, is involved in that of borrowing."[14] The power to emit paper money (e.g. bank notes) has been justified by invoking the Necessary and Proper Clause in combination with the other enumerated powers which include the power to borrow money.[15] The power to "issue bills of credit" is explicitly mentioned in the Constitution as a prohibition on the States, and could therefore be interpreted as a power so momentous that it would have to be conferred explicitly on the federal government rather than inferred from the Necessary and Proper Clause, although it is not entirely clear whether or not the framers intended such an interpretation, nor did the Supreme Court adopt such an interpretation in the Legal Tender Cases or subsequently.

James Madison's notes, from the Constitutional Convention in 1787, include a footnote where he says that the Constitution would not allow the federal government to use paper as currency or legal tender, though there is no indication whether or not the contents of his footnote were uttered aloud at the Convention.[16] Thereafter, during the ratification debates, the Federalist Papers #44 (assumed to be authored by Madison) said that prohibiting states from emitting "bills of credit must give pleasure to every citizen, in proportion to his love of justice and his knowledge of the true springs of public prosperity." He further stated that the issuance of paper money by the states had resulted in "an accumulation of guilt, which can be expiated no otherwise than by a voluntary sacrifice of the power which has been the instrument of it."[17]

Paper money is a form of currency that is physically printed by the Bureau of Engraving and Printing, under authority of the Federal Reserve System. The Bureau of Engraving and Printing is part of the U.S. Treasury Department, whereas the Federal Reserve is not. In contrast to paper money, coins are physically produced by the U.S. Mint, within and under authority of the U.S. Treasury. The Federal Reserve System can authorize as much paper money as it sees fit, but the U.S. Treasury is restricted by law to a certain maximum amount of coinage in circulation.

The Federal Reserve System can also increase the money supply by allowing banks to issue more loans, which is accomplished by reducing the reserve requirement ratio. This regulation of banks is pursuant to the Commerce Clause. Conversely, the Federal Reserve System can reduce the money supply by selling securities or by increasing the reserve requirement ratio.

^The Debates in the Federal Convention of 1787, ed. Madison, James (1787-08-16). Retrieved 2007-02-24. One delegate at the Constitutional Convention went so far as to say that an express power to emit paper money would be "as alarming as the mark of the Beast in Revelation".

^Siegan, Bernard.. The Supreme Court's Constitution, (1987), page 36: “The central government would be able to emit promissory paper ‘as it will be necessary or safe’ pursuant to the borrowing power.”

^Siegan, Bernard. The Supreme Court's Constitution, (1987), page 27: “Because the power was not banned, Congress could print paper money and designate it legal tender under its necessary and proper power (article I, section 8, clause 18) once the required relationship to an enumerated power had been established."

^The Debates in the Federal Convention of 1787, ed. Madison, James (1787-08-16). Retrieved 2007-02-24. The full text of Madison's footnote is as follows: "This vote in the affirmative by Virga. was occasioned by the acquiescence of Mr. Madison who became satisfied that striking out the words would not disable the Govt. from the use of public notes as far as they could be safe & proper; & would only cut off the pretext for a paper currency, and particularly for making the bills a tender either for public or private debts."